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5 things to consider when choosing margin loans

Taking out a margin loan could be an effective way to grow your investment portfolio. But borrowing to invest is a high-risk strategy that’s designed for professional investors and is not necessarily right for beginners or the less experienced.

That’s why it’s important to understand your investment goals, set a clear path to achieving them, and do your homework to find the right margin loan for you.

1. Have you defined your goals?

Investors use margin loans to buy more shares, but it’s no good just buying for the sake of it. Before using a margin loan to expand your portfolio, you need to set some goals and establish an investment strategy for achieving them. You can then work out how a loan fits into your strategy.

2. What sort of features are you looking for?

The features of margin loans vary between financial providers. That’s why it’s important to do your homework and compare providers in order to secure a great deal.

Look for the length of time you have to pay a margin call, the available markets you can invest in, and the minimum and maximum credit limits on the loan.

3. Have you set aside money for account fees?

he interest rate on your margin loan isn’t the only number you should keep an eye on. Financial providers also charge a range of set-up and account fees, so make sure you factor these in when comparing offers. Lower interest rates don’t necessarily represent the best overall value.

4. Do you understand the terms and conditions?

It’s important to understand the terms and conditions of your margin loan. These vary between financial providers, and call for a thorough comparison to ensure you’re getting the right financial product for your needs. Make sure you’re comfortable with the repayment structure and that you understand your liabilities.

5. Are you prepared for a margin call?

A margin call happens when the value of your shares falls, thus increasing your approved Loan to Valuation Ratio (LVR). That results in your loan becoming larger than your approved equity ratio. A margin call is essentially asking you to cover this difference.

Most investors maintain a cash reserve to pay any margin calls that arise. Either way, your investment strategy should account for margin calls so they don’t catch you by surprise.

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